South African companies are undervalued by the stock market in London because foreign investors are concerned about the Black Economic Empowerment initiative, according to finance professionals.

Investing in South African companies is seen as "high-risk" and the initiative is seen a means of bringing nationalisation through the back door, according to Geoff Miller from London-based Bridgewell Securities.

As such, giving equity and jobs to the underprivileged amounts to a tax, some investors insist.

But Mr Miller, along with a host of other analysts, believe they are wrong.

Access

Empowerment will not upset the apple cart, several analysts agreed at a recent conference in London.

On the contrary, empowerment - which is enshrined in South Africa's Financial Services Charter which came into effect this year - will lead to growth, they stressed.

BEE 'SCORE CARDS'

30% of points related to black ownership

30% to numbers of black board members, employees and training

30% related to how well a company promotes enterprise

10% issues which will be determined by each industry

Empowerment should lead to the promotion of black South Africans, including women, to company boards and transform the way companies choose their staff.

And it should make financial services available to more people.

To make this happen, the industry aims to make sure that eight in 10 South Africans will have a bank within 20 kilometres of their homes or work places in the next few years

Procurement

How well companies fare under the Black Economic Empowerment initiative will be measured by points recorded on a score card, made public at the same time a company announces its annual results.

Poverty still reigns in South Africa

The initiative is also about how a company chooses firms that provide it with services.

"In South Africa, there are a lot of old boys' networks," said Nkosana Mashiya, banking director at the South Africa's treasury.

"The charter promotes procurement from a broader industry."

Greater gap

Most people agree that South Africa, which is gearing up to celebrate the tenth anniversary of its first free election, must overhaul its economy to avoid instability.

Many black South Africans still live in desperate poverty, and for a large number the situation is getting worse, rather than better, according to experts.

A survey by id21 last year found that blacks are getting poorer in the new South Africa, while whites are getting richer.

In 2002, two out of three black households in Cape Town townships did not have enough to eat, the development research body said.

Not to reform, said the South African High Commissioner in London, Dr Lindiwe Mabuza, would lead to people becoming "discontent, disillusioned and even cynical".

BEE benefits business

But the government is promoting the view that the empowerment initiative - which is not compulsory - will actually help the country reach its annual growth target of 6% - up from a modest but consistent 3%.

But sceptics insist this would be tricky, especially given that the initiatives are going to cost money.

INVESTEC: BEE GOALS FOR 2008

Procurement from BEE companies 50% (present level 13%)

Black South African board members 33% (present level 25%

Black South African executives 25% (present level 10%)

The initiative will promote entrepreneurship and improve skills of the workforce, said Lionel October, deputy director of South Africa's department for trade and industry.

A redistribution of wealth will assist growth, he insisted.

Besides, there is flexibility within the initiative, especially for foreign companies with subsidiaries in South Africa, he said.

Funeral services

Insurers Old Mutual has fully embraced the reform, though its chief executive, Jim Sutcliffe suggested that some companies have internationalised their operations to escape the initiative.

His own company has benefited, however, by expanding its services to black South Africans in the form of funeral insurance.

This is the type of behaviour the initiative wants to encourage.

There is no alternative for any supplier not to empower itself - it's a very subtle way to ensure transformation

David Lawrence, Investec

Given the country's high HIV infection rate and the high cost of HIV testing, funeral insurance was something no one wanted to get into, but Old Mutual found a way of making money from it by using statistics.

So although the initiative "is seen as a big threat" by many, "if you set about it you find opportunities", said Mr Sutcliffe.

Tough targets

The investment company Investec admits that some of the empowerment targets will be difficult to reach by the initiative's first review date in 2008.

For example, the initiative calls for change to ensure that more than 11% of its board members and 4% of its executives will be black women in five years time, whereas there are currently none.

Furthermore, presently only 13% of companies servicing Investec are black empowered; by 2008 the initiative wants that rate to reach 50%.

But like many companies in South Africa, Investec backs the reform and will provide 3,000 would-be entrepreneurs with help each month.

Ignorance

"There is no alternative for any supplier not to empower itself," said David Lawrence, deputy managing director of Investec South Africa.

"It's a very subtle way to ensure transformation."

Others agreed.

"They are reforming without a revolution," said one conference delegate.

"Look at Zimbabwe."

"There is no doubt overseas investors in South African companies are worried," aid another delegate.

"The perception of South Africa is bad enough without [the empowerment initiative]. But it's because they don't know much about it."